Investors in Hospitality Investors Trust (“HIT”), also known as American Realty Capital Hospitality Trust or ARC Hospitality, may have FINRA arbitration claims, if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or advisor.
HIT, a public, non-traded real estate investment trust (“REIT”) with a focus on hospitality properties in the United States, reportedly recently amended its limited partnership agreement with a major investor, Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC. Brookfield reportedly holds all of the outstanding Class C limited partnership units in the REIT’s operating partnership. Under the amendment, reportedly Brookfield will receive additional limited partnership units instead of cash distributions to which it would otherwise be entitled.
HIT characterized the move as caused by a cash crunch: “As previously disclosed, due to the impact of the coronavirus pandemic on the company’s business, the company expects it will no longer have sufficient cash on hand to continue to pay its current obligations during the first half of 2021 and the additional liquidity from a source other than property operations the company requires may not be available on favorable terms or at all,” the REIT state in a filing with the SEC. “The objective of the [limited partnership amendment with Brookfield] is to preserve at least in the short-term the company’s cash position as it continues discussions with the Brookfield investor regarding a holistic solution to the company’s liquidity dilemma.”
HIT previously announced a decrease in its estimated net asset value (“NAV”) to $8.35 a share, down from $9.21 per share. As a publicly registered non-traded REIT, HIT was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares upon the recommendation of a broker or money manager. Original investors of HIT could purchase shares at $25.00 per share. However, the REIT’s estimated NAV is currently $8.35, and, even worse, shares on the secondary market have reportedly been sold at prices of under $1.00 a share.
Even the estimated NAV may not tell the whole story, as NAV may not reflect the actual value that shareholders would realize if HIT were liquidated, listed on an exchange or merged with a public company. Financial analysts frequently assume that non-traded investments such as HIT will trade at a discount to NAV if listed on a securities exchange. In a prominent example of this phenomenon, a large non-traded REIT known as American Finance Trust or AFIN that listed its shares in 2018 had published an estimated NAV of $23.56 a share, yet shares later traded for as little as $10.08 after AFIN was listed on the Nasdaq Global Select Market and traded for less than $10.00 a share during most of 2020.
Non-traded REITs pose many risks that are often not readily apparent to retail investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments, including illiquidity and the risk of loss of principal. An additional negative characteristic of non-traded REITs is their high up-front commissions, typically between 7-10%. In addition to high commissions, non-traded REITs like HIT generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%.
Investors who wish to discuss a possible claim may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at firstname.lastname@example.org for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York, New Jersey, Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).
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